Severn Trent has rejected a takeover approach from an overseas consortium, saying the proposal "completely fails" to recognise the water company's value.
The firm, which supplies 4.2 million households and businesses across the Midlands and parts of Wales, said the approach was tabled at “only a modest premium” to its share price prior to bid interest becoming known.
It emerged this week that the consortium featuring Canadian investment group Borealis, the Kuwait Investment Office and Universities Superannuation Scheme, was interested in making an offer for Severn.
Speculation that a potential bid could be worth around £5.3 billion caused its shares to jump by 14 per cent yesterday to a record high of 2077p, although the stock fell back slightly after Severn rejected the proposal.
Its shares were at 1835p, or £4.3 billion, prior to the bid interest on May 13.
The company met with the Kuwait Investment Office (KIO), Borealis Infrastructure Management and the Universities Superannuation Scheme.
In a statement, Severn said it met representatives of the consortium for the first time to consider the approach.
It said: “At that meeting, a conditional proposal was tabled by the consortium at only a modest premium to the share price before the announcement of May 14.
“The board of Severn Trent has reviewed the proposal with its advisers and concluded that it completely fails to recognise the existing and potential value of Severn Trent. Accordingly the board has informed the consortium that it has rejected the proposal.”
The consortium faces a final deadline of June 11 to make a firm offer.
If a deal does materialise, it would make Severn Trent the latest UK water company to be bought by foreign investors. Thames Water was acquired in 2006 by a consortium led by Australian investment group Macquarie for £8 billion.
British water firms are prized by foreign investors and pension funds for their monopoly on customers and relatively stable returns.
Severn is the latest British utility to attract interest after buyouts including Yorkshire Water, Northumbrian Water and Thames Water.
Borealis already co-owns the UK’s biggest ports operator Associated British Ports and the London to Paris High Speed 1 rail line. It invests on behalf of thousands of Canadian workers and pensioners in the Ontario Municipal Employees Retirement System.
The Kuwait Investment Authority invests the emirate’s vast oil wealth while the Universities Superannuation Scheme invests the pensions of UK higher education workers.
Tina Cook, analyst at Charles Stanley, said despite the appeal of UK listed water companies to overseas investors and infrastructure funds, the timing of the approach for Severn Trent was “surprising”.
“The timing of the potential deal is somewhat surprising in that it comes just ahead of the UK water sector’s next regulatory price review 2015-20, which is currently underway and due to be finalised next year,” she said.
“This inevitably creates some mid-term risk across the sector.”
Last month, Severn Trent announced that its chief executive, Tony Wray, had told the board of his intention to step down in Spring 2014 after seven years in the role and nine at the company.
The company said it was announcing his retirement to allow the necessary time to a search for his successor, as well as an “orderly handover”.
Andrew Mead, analyst at Goldman Sachs, said Ofwat could make gains from a takeover “less attractive” by limiting price rises.
But he added: “Historically none of the previous approaches in the water sector that have been announced in the last 10 years have failed in taking over the water company.”